Author Topic: Efficient Markets, RIP  (Read 95986 times)

smedleyb

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Efficient Markets, RIP
« on: June 27, 2012, 04:35:46 PM »
Wanna get rich?  Perhaps it's time to start thinking outside the Efficient Market Hypothesis box, folks.  But don't take it from me:

How badly did the economics profession, academics and market pros alike, fail? Classic economic belief systems could not appropriately anticipate in advance or even identify in real time what was happening with the Residential RE/Housing market. They failed to see the Great Recession coming or even the market collapse.

The basis for this failure was the erroneous belief that “efficient markets formed by people holding rational expectations could explain virtually all economic activity.”

That thesis has now been thoroughly discredited. It is still taught in colleges and business schools, which is why I find most MBAs not worth hiring. Frequently, they can be worse than clueless — they are steeped in the bad ideas of long dead economists, and in my profession, that is not a formula for making money.


http://www.ritholtz.com/blog/2011/06/shiller-more-expectations-theory-less-efficient-market-hypothesis/

“It’s the theories adopted by both the regulators and the market participants that proved to be false,” Soros, 80, said in an October 2010 interview released today by the Financial Crisis Inquiry Commission on its website. “It’s the efficient- market hypothesis and the rational expectations theory.”

http://www.bloomberg.com/news/2011-02-11/soros-says-financial-crisis-was-fueled-by-flawed-market-theories.html

And for the Buffett fanboys and girls around here who think he has their backs:

Buffett starts the article with a rebuttal of a popular academic opinion that Graham and Dodd's approach ("look for values with a significant margin of safety relative to [stock] prices")[2] had been made obsolete by improvements in market analysis and information technology. If the markets are efficient, then no one can beat the market in the long run; an apparent long-term success can happen by pure chance only. However, argues Buffett, if a substantial share of these long-term winners belong to a group of value investing adherents, and they operate independently of each other then their success is more than a lottery win; it is a triumph of the right strategy.[3]

http://en.wikipedia.org/wiki/The_Superinvestors_of_Graham-and-Doddsville

This is just a taste of the variant viewpoint -- obviously not held by certain prolific posters around these parts -- that the efficient market hypothesis is dead.  Thus, it appears that analysis, research, and hard work allows an investor to gain a certain edge over blindly throwing money into general market funds which (a) charge fees (b) are by definition incapable of providing investors with outsized returns.

Of course, I will be asked to "prove" these statements, as if quoting venerable market players like Ritholtz, Soros, and Buffett is simply insufficient evidence. 

And as always, never make an investment decision based on what you read on the internets; but a corollary to this rule is: never invest blindly committed to a certain investment ideology, especially one that has been so thoroughly discredited by some of the greatest investors of our age. 
« Last Edit: June 27, 2012, 04:58:18 PM by smedleyb »

tannybrown

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Re: Efficient Markets, RIP
« Reply #1 on: June 27, 2012, 05:08:40 PM »
But doesn't Buffet recommend that most investors should just buy index funds?

http://www.reuters.com/article/2007/05/07/berkshire-indexfunds-idUSN0628419820070507

Simply put, I ain't Warren.

arebelspy

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Re: Efficient Markets, RIP
« Reply #2 on: June 27, 2012, 05:17:52 PM »
I'm automatically skeptical when people claim anything is "dead."  Google "the death of equities" for a great example.

Absolutely it's overly simplistic to claim markets are efficient and actors are rational.

Markets certainly can be inefficient, and a savvy investor may be able to take advantage of that.

However history has shown that the vast, vast majority of people can't, and just straight up lose money doing this.  Therefore it seems to me that the best way to take advantage of this knowledge is to not try to beat the experts.  Try to lower your cost as much, own the market, and that will maximize gains and minimize work.  That's what 97%+ of people out there should do.

If you're one of the rare 3%, that's fine, but that doesn't mean you should be convincing others to do the same.  IMO.

As an aside, let's try to keep this thread insult/snark free.

Obviously some people will be insulted as their viewpoint gets challenged, but try to keep it civil and not get defensive and if someone is snarky try not to respond in kind.  Cool?
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smedleyb

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Re: Efficient Markets, RIP
« Reply #3 on: June 27, 2012, 05:28:21 PM »
But doesn't Buffet recommend that most investors should just buy index funds?

http://www.reuters.com/article/2007/05/07/berkshire-indexfunds-idUSN0628419820070507

Simply put, I ain't Warren.

I too think most investors are fine with index funds.  My intention is to simply create a thread in which to discuss the presuppositions and inalienable truths held by some posters who cling to the discredited idea that markets are always efficient and rational.  You know, rather than get into these meta-market debates when the topic is "should I buy XYC," or "should I sell the "ABCDX" fund.  I'm simply following Arabelspy's advice and creating a thread to discuss these matters in their own space, rather than hijack specific threads where the OP could give two craps about EMH, or the virtues of technical analysis, or the role of emotional trading in the process of price discovery.

 

 


AJ

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Re: Efficient Markets, RIP
« Reply #4 on: June 27, 2012, 05:38:20 PM »
If you're one of the rare 3%, that's fine, but that doesn't mean you should be convincing others to do the same.  IMO.

This, but also it is disadvantageous to share knowledge of market inefficiencies. The more people that are able to recognize inefficiencies, the faster they will be closed. It is in your financial best interest to keep such knowledge for yourself, unless you plan to market a book on the subject. I mean, why deal with all the flak from index-only-ers for no payoff?

skyrefuge

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Re: Efficient Markets, RIP
« Reply #5 on: June 27, 2012, 05:49:14 PM »
the presuppositions and inalienable truths held by some posters who cling to the discredited idea that markets are always efficient and rational.

Has anyone here actually expressed that belief?  Personally, I've always thought any economic theory that ignores human irrationality is dumb.  Arebelspy has stated the same multiple times.  Who else are you referring to?  If no one, then hey, we're all in agreement on that matter.  Woo hoo!

It is in your financial best interest to keep such knowledge for yourself, unless you plan to market a book on the subject. I mean, why deal with all the flak from index-only-ers for no payoff?

ha, good point.  I was also initially in the midst of writing a post asking smedleyb what his motivation was for continuing on this topic since it wasn't obvious to me (thankfully he answered the question in his follow-up post before I even asked), but I hadn't considered this aspect!

smedleyb

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Re: Efficient Markets, RIP
« Reply #6 on: June 27, 2012, 05:52:36 PM »
If you're one of the rare 3%, that's fine, but that doesn't mean you should be convincing others to do the same.  IMO.

This, but also it is disadvantageous to share knowledge of market inefficiencies. The more people that are able to recognize inefficiencies, the faster they will be closed. It is in your financial best interest to keep such knowledge for yourself, unless you plan to market a book on the subject. I mean, why deal with all the flak from index-only-ers for no payoff?

Because I think US equity markets are not fundamentally sound; that they are being propped up by trillions in monetary and fiscal stimulus which has produced an anemic sub 2% GDP growth rate, and I would consider myself a bad mustachian if I didn't advance my concerns to a group of folks who I think are awesome, helpful, and genuinely interested in radically improving their financial lives.

You think I share this knowledge anywhere else?  You think imparting what little knowledge I've accumulated over the years might harm my own ability to exploit perceived inefficiencies?  I could care less about that.  But I know in my heart I could never live with myself if I just sat back and allowed everyone's FU money to be vaporized in the coming market storm. 

And yes, there are storm clouds forming over the horizon.  Doesn't mean it's on the agenda for today, or this week, or this year; but mark my words, all is not well on Wall Street. 

But more importantly, the point is not to lament the coming day of reckoning, but rather to put ourselves in a position to profit from it.  It's why I recommend building cash as an asset, even if you're losing 2%, and why I suggest to many posters to gently wade into the stock market rather than rush all in, especially now at these levels after the NDX and S&P have doubled off their lows.

In chaos, comes opportunity. 

 


smedleyb

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Re: Efficient Markets, RIP
« Reply #7 on: June 27, 2012, 06:03:30 PM »
Has anyone here actually expressed that belief?  Personally, I've always thought any economic theory that ignores human irrationality is dumb.  Arebelspy has stated the same multiple times.  Who else are you referring to?  If no one, then hey, we're all in agreement on that matter.  Woo hoo!

My thought is a general one, not to do with Telefonica in particular.

Here goes, and no offense intended.

Do you know something everyone else doesn't know?  If not, if you're basing your analysis on public information, what makes you think it isn't already factored into the price?
[/b]

-- Arabelspy

It looks like you're saying that you knew ahead of time that commodities would do well in 2004-2008 and banks would do well in 2009, and that further you knew that they would do so much better than the market expected them to that they were underpriced and so you managed to beat overall market returns by investing in them, which is saying that you knew about and exploited a significant market inefficiency that was based on publicly known information.

More generally, you're saying that by being a discriminating investor you can beat market returns. The fact that one's discrimination even comes into the discussion of investing returns suggests that you think investing is skill based, which means you think that there are significant market inefficiencies that are exploitable by an intelligent and skilled investory based on publicly known information. Again, that's violating a sacred truth for me.


-- grantmeaname.


tannybrown

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Re: Efficient Markets, RIP
« Reply #8 on: June 27, 2012, 07:18:25 PM »
But doesn't Buffet recommend that most investors should just buy index funds?

http://www.reuters.com/article/2007/05/07/berkshire-indexfunds-idUSN0628419820070507

Simply put, I ain't Warren.

I too think most investors are fine with index funds.  My intention is to simply create a thread in which to discuss the presuppositions and inalienable truths held by some posters who cling to the discredited idea that markets are always efficient and rational. 

 

Yes, markets are inefficient and you've cited experts, including Buffet, to support that.  I agree.  But Buffet's advice to amateur investors is not to find these inefficiencies and exploit them.  It's the opposite.

I can agree with the idea that markets are inefficient.  Can you agree it's a bad idea for almost anyone to put into practice?

arebelspy

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Re: Efficient Markets, RIP
« Reply #9 on: June 27, 2012, 07:27:32 PM »
Quote from: arebelspy
Do you know something everyone else doesn't know?  If not, if you're basing your analysis on public information, what makes you think it isn't already factored into the price?

I don't see how my quote here disagrees with anything I've posted in this thread.

Markets certainly can be inefficient, and a savvy investor may be able to take advantage of that.

However history has shown that the vast, vast majority of people can't, and just straight up lose money doing this.  Therefore it seems to me that the best way to take advantage of this knowledge is to not try to beat the experts.  Try to lower your cost as much, own the market, and that will maximize gains and minimize work.  That's what 97%+ of people out there should do.

If you're one of the rare 3%, that's fine, but that doesn't mean you should be convincing others to do the same.  IMO.

This statement is still 100% true.  As is the one above.

You may know something others don't, based on your technical analysis.  You may not.  You may only think you do.  You may be one of the rare few.  You probably aren't.

But again, if you don't know something others don't, then you aren't even speculating, you're straight up gambling.
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smedleyb

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Re: Efficient Markets, RIP
« Reply #10 on: June 27, 2012, 08:04:11 PM »
But doesn't Buffet recommend that most investors should just buy index funds?

http://www.reuters.com/article/2007/05/07/berkshire-indexfunds-idUSN0628419820070507

Simply put, I ain't Warren.

I too think most investors are fine with index funds.  My intention is to simply create a thread in which to discuss the presuppositions and inalienable truths held by some posters who cling to the discredited idea that markets are always efficient and rational. 

 

Yes, markets are inefficient and you've cited experts, including Buffet, to support that.  I agree.  But Buffet's advice to amateur investors is not to find these inefficiencies and exploit them.  It's the opposite.

I can agree with the idea that markets are inefficient.  Can you agree it's a bad idea for almost anyone to put into practice?

Absolutely agree.  Like I said in that very quote: "I too think most investors are fine with index funds.

But that's because I think most investors are lazy about their finances.  I don't see how somebody who busts their ass to save a few bucks can turn around and entrust a total stranger with their net worth without bothering to educate themselves on the nuances, complexities, and extreme risk which comes with equity investing.  I know people who are geniuses at what they do, but they nonchalantly hand over multiple hundreds of thousands over to Wall Street.  Really?  Fuck those crooks.  Seriously.

If MMM is a FI DIY, then delving deeper into the intricacies of the market is a natural corollary to that endeavor.  I mean, we tile our own bathrooms, cook our own food, fix our own bikes, mend our own shirts, but we can't replicate what some Harvard hack with a newly minted MBA is doing just a few years removed from grad school with our precious retirement dollars? 

And of course Buffett shills for the fund industry.  Who do you think drives his precious blue chips higher year after year? -- Billy Bob Johnson, avid MMM reader and market prognosticator from South Dakota, or Winston Chase III, MBA fund boy with several billion IRA dollars at his disposal at Superfund Index Corporation? 

Okay, that last bit about the Oracle of Omaha was definitely snide!

 


tannybrown

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Re: Efficient Markets, RIP
« Reply #11 on: June 27, 2012, 08:26:46 PM »
But investing in index funds isn't akin to handing your money over to a stranger...investing in a managed fund would be.

"but we can't replicate what some Harvard hack with a newly minted MBA is doing just a few years removed from grad school with our precious retirement dollars?"

I think the point is that we don't want to replicate the Harvard grad's work, because the majority of the funds those guys manage don't beat the market.  It's also hard to say it's unmustachian to invest in index funds when the blog's writer advocates for the opposite.  Yes, it's mustachian to DIY home repair...doesn't necessarily mean I should build my own microwave.  DIY something doesn't mean DIY everything.

Finally, I don't see how discrediting Buffet works at this point.  You cited him to build your argument.

« Last Edit: June 27, 2012, 08:46:07 PM by tannybrown »

smedleyb

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Re: Efficient Markets, RIP
« Reply #12 on: June 27, 2012, 08:30:19 PM »
You may know something others don't, based on your technical analysis.  You may not.  You may only think you do.  You may be one of the rare few.  You probably aren't.

But again, if you don't know something others don't, then you aren't even speculating, you're straight up gambling.

Let me turn the tables a bit and ask you a question:  what makes you think Las Vegas real estate is a buy?  I mean, we're talking about a city that is built around one industry -- gambling -- but that industry is becoming highly competitive to the point that Asia is exploding and gambling revenue is becoming much more fractured in this country as municipalities scramble to boost revenues.  Could Vegas be experiencing a secular decline akin to what Detroit -- another city built on one industry -- experienced in the 70's on?  Is buying real estate in Vegas like buying a home in Detroit back in 1980, which entails collapsing prices and rents over time?  And mind you, that's before we get into the water issues that could easily render that city uninhabitable in the near future.  Do you know something about the long term prospects of Vegas real estate that enables you to buy at today's depressed prices with confidence? 

You and I do the same thing, but you're betting Vegas is not in a deep secular decline -- you may be right, you may not be; and I'm betting that stocks will experience a 20-40% haircut over the next 36 months -- I may be right, I may be wrong.  In the end we're both attempting to exploit a perceived inefficiency in markets we think we know and understand.

(And just to clarify, I got nothing against Vegas.  Love the city, love the area, and I hope the Detroit analogy fails to hold up.  I want you to prosper and do well.)   




arebelspy

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Re: Efficient Markets, RIP
« Reply #13 on: June 27, 2012, 08:47:49 PM »
Let me turn the tables a bit and ask you a question:  what makes you think Las Vegas real estate is a buy?  I mean, we're talking about a city that is built around one industry -- gambling -- but that industry is becoming highly competitive to the point that Asia is exploding and gambling revenue is becoming much more fractured in this country as municipalities scramble to boost revenues.  Could Vegas be experiencing a secular decline akin to what Detroit -- another city built on one industry -- experienced in the 70's on?  Is buying real estate in Vegas like buying a home in Detroit back in 1980, which entails collapsing prices and rents over time?  And mind you, that's before we get into the water issues that could easily render that city uninhabitable in the near future.  Do you know something about the long term prospects of Vegas real estate that enables you to buy at today's depressed prices with confidence? 

That's a fair question. 

I'll assume you realize the benefits of investing in positive cash flow properties (plus potential appreciation, depreciation, equity paydown, and mortgage interest writeoff), so I won't go into why real estate specifically is a buy right now.

Why Vegas specifically?  Cause that's where I live, and by my analysis it'll make me money.  There are several other places in the US I'd also be buying real estate right now, and several places I wouldn't touch.


You and I do the same thing, but you're betting Vegas is not in a deep secular decline -- you may be right, you may not be; and I'm betting that stocks will experience a 20-40% haircut over the next 36 months -- I may be right, I may be wrong.  In the end we're both attempting to exploit a perceived inefficiency in markets we think we know and understand.

It's probably closer than I'd like to admit.  However there are a few differences.  Real estate is backed by physical assets, so the chance of it going to zero is almost nil.  It kicks off significant cash (one could compare to dividends).  One big difference though: I can borrow to purchase it at historically low rates.  Sure, one can borrow to buy stock, but I have no risk of a margin call, and am making money even if the house value goes down, and someone else is paying off that borrowed amount for me.   If I could get a stock backed by a physical asset, get leverage on it, have no chance of a margin call, and have someone paying for that stock for me, and get tax benefits for owning it, I'd be all over that.

That being said, I am timing a market.  And I have less issue with someone trying to time broad trends.  If you think the market will get a 20-40% haircut in the next 3 years, okay.  I'd actually say that's more likely than not.  Harvesting profits and moving to cash can be fine.  It's market timing, but if it works for you, more power to you.

Real estate moves pretty slowly, in broad trends.  It's still just as hard to call a bottom (or top), but you can tell when it's over or under valued.  I.e. buying a house in 06 would be cash flow negative?  Don't buy.  Then you're hoping it goes up, and lose money if it doesn't.

Likewise, if you see at stock at 100 P/E, you can tell it's overvalued.  Similarly, one at a projected 5 P/E (probably) is undervalued (some rare exceptions aside).  If you think the S&P is historically high, you may want to harvest profits and increase the cash portion of your AA.

I actually have no problem with an informed investor doing that within a part of their investing plan.

Betting on individual stocks is different than betting on broad trends, however.

And again, I can't support promoting that to people asking basic investing questions.  That should be after investing 5 or 10+ years, and actually understanding their investments.

I guess one problem I have with your arguments you keep making is that you say "oh well learning about it is better than paying someone these huge fees" as if that's what we're telling people to do.  No, we're saying the opposite, DIY and index fund.  If you want to try to dabble with timing the market and individual stocks at some point, okay.  But start there.  And then you toss out a strawman like "well they should learn about timing individual stocks right away rather than paying 3% to someone" ... huh?  All of us agree they shouldn't do that.  So can you stop tossing that out there, as if someone claimed it should happen?

(And just to clarify, I got nothing against Vegas.  Love the city, love the area, and I hope the Detroit analogy fails to hold up.  I want you to prosper and do well.)

Thank you, and likewise.
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skyrefuge

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Re: Efficient Markets, RIP
« Reply #14 on: June 27, 2012, 09:00:21 PM »
I mean, we tile our own bathrooms, cook our own food, fix our own bikes, mend our own shirts, but we can't replicate what some Harvard hack with a newly minted MBA is doing just a few years removed from grad school with our precious retirement dollars?

Well, that Harvard hack is probably losing money, so sure, we could probably replicate that if we wanted to.  I'm sure you understand how index funds work, but with your talk of "crooks" like that, and your mentions of 2-3% expense ratios, it makes me wonder what you're actually talking about.

Anyhow, I'd say that now it seems then that the main disagreement here is one of degree.  We all generally think that it's possible to beat the market over the long term, you just believe that it's fairly easy to do with a little bit of work, while those of us on the other side think it's outside of our abilities, even if we were not limited by time and interest.

Even though I think really highly of my own intelligence, for some reason a long time ago I became pretty confident that I did not have the intelligence, skill, and perhaps most importantly, emotional control to beat the market.  I never even tried to.  Maybe that's dumb and I underestimate myself.  But now, whenever I start to think that maybe I could if I gave it a shot, I remind myself of this:

A couple years I interviewed for a job at a company doing high-speed algorithmic trading.  They had incredibly fast computers running incredibly optimized software so they could apply their incredibly sophisticated trading philosophies within microseconds when new information was received.  Most of the informational input to their algorithms was delivered electronically from external sources, but some still came the old-fashioned way, via telephone.  One piece of data they received once a week via a conference call or something, and it was always a 3 digit number (a commodity price or something).  They determined that having a guy listen to that number and type it into a computer as fast as he could was still too slow.  So they got three guys, and assigned them each a single digit to listen for and type into 3 different keyboards.  But that was still prone to error, so they got nine guys, three for each digit, and treated their inputs as "votes", in case one of the guys hit the wrong key in his haste.  And still, the ability of their software to react in microseconds was too slow, so they were starting to move to hardware-based solutions to bring the reaction time down to nanoseconds.

FFFFFFFUUUUUUCKKK.  I ain't got no chance against that! 

And I understand that raw speed is only one angle to take to exploit inefficiency, but if one company is spending such enormous amounts of effort to cover that angle, I'm sure there are other companies spending an equal amount of effort to cover every other possible angle.  The only remaining way that I can imagine that I could exploit inefficiency is if I was able to hold myself apart from a mass delusion that all these other guys would temporarily suffer under.  But if people could easily hold themselves apart from mass-delusion, there would be no mass delusions!
« Last Edit: June 27, 2012, 09:51:24 PM by skyrefuge »

smedleyb

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Re: Efficient Markets, RIP
« Reply #15 on: June 27, 2012, 09:16:47 PM »
Well, that Harvard hack is probably losing money, so sure, we could probably replicate that if we wanted to.  I'm sure you understand how index funds work, but with your talk of "crooks" like that, and your mentions of 2-3% expense ratios, it makes me wonder what you're actually talking about.

Taken from another thread, posted by joer1212:

After much thought, I had just decided that I would include BRSIX into my Roth IRA, but when I went to purchase this fund at Vanguard I found out that the expense ratio had increased to 0.92% (from 0.75% a few years ago).
Not only that, there is a management fee of 0.50% on top of this, plus a "redemption" fee of 2%.
This is disgusting, and completely unacceptable.
I decided to do without this fund. In fact, I will do without a micro-cap fund at all until a true, low-cost micro-cap fund becomes available. Are you listening, Vanguard?

arebelspy

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Re: Efficient Markets, RIP
« Reply #16 on: June 27, 2012, 09:18:56 PM »
Well, that Harvard hack is probably losing money, so sure, we could probably replicate that if we wanted to.  I'm sure you understand how index funds work, but with your talk of "crooks" like that, and your mentions of 2-3% expense ratios, it makes me wonder what you're actually talking about.

Taken from another thread, posted by joer1212:

After much thought, I had just decided that I would include BRSIX into my Roth IRA, but when I went to purchase this fund at Vanguard I found out that the expense ratio had increased to 0.92% (from 0.75% a few years ago).
Not only that, there is a management fee of 0.50% on top of this, plus a "redemption" fee of 2%.
This is disgusting, and completely unacceptable.
I decided to do without this fund. In fact, I will do without a micro-cap fund at all until a true, low-cost micro-cap fund becomes available. Are you listening, Vanguard?


..okay?  And he specifically didn't invest because of the high expense ratio.  As all of us would have advised. 

I missed the part where you quoted all of us telling him those fees were reasonable and he should suck it up and pay them.
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arebelspy

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Re: Efficient Markets, RIP
« Reply #17 on: June 27, 2012, 09:23:26 PM »
Relevant to this thread, over on the ERE forum there's a topic about predictions about the DOW.

http://forum.earlyretirementextreme.com/topic.php?id=554

It was started a year ago and bumped up this week.

Jacob, someone whom many of us here respect quite a bit, said at the time:
Quote
Over 13000 and stay there for 0-500 days. Then it'll drop to under 10000 faster than most people can say "sell".

He listed some reasoning for it.

This week he posted:
Quote
Under 10k I said a year ago ... and I was wrong. And this is why I don't go short but only go defensive ... because I was right about the first part.

He may be right that it will go under 10k, but have the wrong timing.  But when you're speculating, timing is everything.

As the saying goes: "The market can stay irrational longer than I can stay solvent."

You may think you're right.  You may even be right, about what it should do.  But if the market doesn't agree, you lose.

So while you may be able to make a decent prediction, you don't know the future and even if you do know what will happen, you likely don't know when it will happen.  Some rare few may be able to get close.

But most are just wrong.  Especially when they start trying to time individual stocks.
I am a former teacher who accumulated a bunch of real estate, retired at 29, spent some time traveling the world full time and am now settled with three kids.
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smedleyb

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Re: Efficient Markets, RIP
« Reply #18 on: June 27, 2012, 09:33:54 PM »
Well, that Harvard hack is probably losing money, so sure, we could probably replicate that if we wanted to.  I'm sure you understand how index funds work, but with your talk of "crooks" like that, and your mentions of 2-3% expense ratios, it makes me wonder what you're actually talking about.

Taken from another thread, posted by joer1212:

After much thought, I had just decided that I would include BRSIX into my Roth IRA, but when I went to purchase this fund at Vanguard I found out that the expense ratio had increased to 0.92% (from 0.75% a few years ago).
Not only that, there is a management fee of 0.50% on top of this, plus a "redemption" fee of 2%.
This is disgusting, and completely unacceptable.
I decided to do without this fund. In fact, I will do without a micro-cap fund at all until a true, low-cost micro-cap fund becomes available. Are you listening, Vanguard?


..okay? And he specifically didn't invest because of the high expense ratio.  As all of us would have advised. 

I missed the part where you quoted all of us telling him those fees were reasonable and he should suck it up and pay them.

I thought Skyrefuge was saying that such high fees don't really exist.  I was trying to show they do.

smedleyb

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Re: Efficient Markets, RIP
« Reply #19 on: June 27, 2012, 09:45:09 PM »
Relevant to this thread, over on the ERE forum there's a topic about predictions about the DOW.

http://forum.earlyretirementextreme.com/topic.php?id=554

It was started a year ago and bumped up this week.

Jacob, someone whom many of us here respect quite a bit, said at the time:
Quote
Over 13000 and stay there for 0-500 days. Then it'll drop to under 10000 faster than most people can say "sell".

He listed some reasoning for it.

This week he posted:
Quote
Under 10k I said a year ago ... and I was wrong. And this is why I don't go short but only go defensive ... because I was right about the first part.

He may be right that it will go under 10k, but have the wrong timing.  But when you're speculating, timing is everything.

As the saying goes: "The market can stay irrational longer than I can stay solvent."

You may think you're right.  You may even be right, about what it should do.  But if the market doesn't agree, you lose.

So while you may be able to make a decent prediction, you don't know the future and even if you do know what will happen, you likely don't know when it will happen.  Some rare few may be able to get close.

But most are just wrong.  Especially when they start trying to time individual stocks.

This is fine and dandy, but let me make one huge point of clarification: arguing against the notion that markets are fundamentally "efficient" and "rational" does not necessarily entail "I thus have the power to absolutely time the market perfectly."  This is rather your own straw man that you've brought to the table.  Nowhere did I claim to have some special insight into the proper "times" to buy and sell.  But I think assimilating the notion of time into an investment decision is vital.  For example, bottoms don't always mean "buy now."  Sometimes asset prices bounce along the bottom for years before a big bull move, leading to opportunities lost elsewhere.

Like somebody once said, you can pick the time, or you can pick the price, but you ain't getting both.   

Also, anyone who bases their market prognostications on the DJIA is a rank amateur!

S&P baby, S&P -- with a touch of NDX and BKX thrown in for flavor.

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Re: Efficient Markets, RIP
« Reply #20 on: June 27, 2012, 09:58:05 PM »
It has nothing to do with market efficiency.

If you accept that over a short period of time, stock markets can go up or down ~40% in a given year, but over a long time, economic growth happens and the value of owning distributed capital will pay  probably 7% compounded, this might be enough. But coupled with the debt market, aka bonds, you can get ~5+% RRR with a lot lower volatility too.

This can sustain FI and and safe withdrawal rate. Worst case is cashflow yield from the market.

That's investment.


arebelspy

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Re: Efficient Markets, RIP
« Reply #21 on: June 27, 2012, 10:07:02 PM »
This is fine and dandy, but let me make one huge point of clarification: arguing against the notion that markets are fundamentally "efficient" and "rational" does not necessarily entail "I thus have the power to absolutely time the market perfectly."  This is rather your own straw man that you've brought to the table.  Nowhere did I claim to have some special insight into the proper "times" to buy and sell.

Maybe it's me, but you sure seemed to be claiming some special insight when talking with confidence about the right time to buy in those other threads.

I agree, I do not have the power to time the markets perfectly.

So I'd rather dollar cost average, rebalance, and let MPT take me there via the economic growth Mr Mark is referencing.

Maybe I can scrape better than that 7% by buying at certain times and selling at certain times.  Or maybe I'm like the vast majority of investors, both professional and amateurs, and underperform that.  The latter is much more likely, so I'm happy with just getting the market returns and not speculating.

To each his own, and good luck to both of us.
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smedleyb

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Re: Efficient Markets, RIP
« Reply #22 on: June 27, 2012, 10:14:29 PM »
It has nothing to do with market efficiency.

If you accept that over a short period of time, stock markets can go up or down ~40% in a given year, but over a long time, economic growth happens and the value of owning distributed capital will pay  probably 7% compounded, this might be enough. But coupled with the debt market, aka bonds, you can get ~5+% RRR with a lot lower volatility too.

This can sustain FI and and safe withdrawal rate. Worst case is cashflow yield from the market.

That's investment.

Bonds will be the worst investment for the next 20 years, just as they've been the best for the past 20.

Markets don't always go up.  The Nikkei is a fraction of what it was 23 years ago, and Japan is no economic slouch.

I wonder how many readers MMM would have had in March 2009?  My point being, everybody pinning their hopes on FI through the automatic investment style espoused by most of mainstream financial media are in for a rude ride until the economic imbalances are wrung out of the system and a genuine economic expansion -- one generated through investment from savings rather than through debt and deficit fueled economic shenanigans  -- takes root.   




Mr Mark

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Re: Efficient Markets, RIP
« Reply #23 on: June 27, 2012, 10:29:32 PM »
No, not that . I take it as given markets may go up and down.

But a balanced asset allocation ensures 'sell high' and 'buy low' tend to happen automatically.

I don't have to call the market, or try to guess the future. I'm like a bookie, I win long term no matter what. And beat most investors.

arebelspy

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Re: Efficient Markets, RIP
« Reply #24 on: June 27, 2012, 10:32:21 PM »
It has nothing to do with market efficiency.

If you accept that over a short period of time, stock markets can go up or down ~40% in a given year, but over a long time, economic growth happens and the value of owning distributed capital will pay  probably 7% compounded, this might be enough. But coupled with the debt market, aka bonds, you can get ~5+% RRR with a lot lower volatility too.

This can sustain FI and and safe withdrawal rate. Worst case is cashflow yield from the market.

That's investment.

Bonds will be the worst investment for the next 20 years, just as they've been the best for the past 20.

Markets don't always go up.  The Nikkei is a fraction of what it was 23 years ago, and Japan is no economic slouch.

I wonder how many readers MMM would have had in March 2009?  My point being, everybody pinning their hopes on FI through the automatic investment style espoused by most of mainstream financial media are in for a rude ride until the economic imbalances are wrung out of the system and a genuine economic expansion -- one generated through investment from savings rather than through debt and deficit fueled economic shenanigans  -- takes root.

You may be right on some, most, or even all of that.  You may even be close on timing.

I do think we're in a deleveraging period.

However I also don't think a bull run is out of the question.  I just don't know for sure.

I've also thought interest rates would rise in 2010.  And 2011.  And 2012.  And darn it, they just aren't rising.

And again, trying to track and guess broad trends is a far cry from trying to time individual stock purchases.  You seem to base arguments off broad economic indicators, but claim you can guess when a stock is undervalued as well.

If so, you should have no trouble being FIRE'd very soon.  I'm just more skeptical.  Not that it's not possible.  It's just very unlikely.
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smedleyb

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Re: Efficient Markets, RIP
« Reply #25 on: June 27, 2012, 10:42:22 PM »
No, not that . I take it as given markets may go up and down.

But a balanced asset allocation ensures 'sell high' and 'buy low' tend to happen automatically.

I don't have to call the market, or try to guess the future. I'm like a bookie, I win long term no matter what. And beat most investors.

No you're not the bookie; Wall Street is. 

What if your asset allocation is all wrong?  What if bonds and stocks decline simultaneously?  What if the age of the long decline of index funds is upon us -- a situation created by (a) a heavily indebted youth with scant job prospects and thus no income to invest, and (b) an aged and retired baby boomer generation looking to cash out their IRA money?

What if things are really different this time? 

The point is you don't know, anymore than I know for certain that XYZ will pop 2 points tomorrow. 

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Re: Efficient Markets, RIP
« Reply #26 on: June 27, 2012, 10:54:17 PM »
Smedleyb,

A big problem i have with your approach is that, in the past, it demonstrably doesn't work as an investment strategy. My time frame is 40++ years, effectively infinite. Time and time and time again, the approach you seem to advocate as a way to invest one's stash is just not even close to being capable of delivering a sustainable return.  My way does, even in the past decade.

If you want to discuss ways to speculate, and explore hard to calculate  RRR investments, OK. But lets not say its a reliable way to accumulate one's core FI Stash capital. If you can show a repudiation of Modern Portfolio theory and boggle-headed implementation, go for it.

Speculation can have a place in a portfolio, even a Mustashian one. Calculated risk can lead to great rewards. And lets discuss Mustashian ways to speculate. But can we be clear this is not about speculating one's way out of debt or a low saving rate.

MMM offers a way out that is independent of the throw of a dice, or pretty much anything out of our own control, like the geopolitical global markets. Focus on what you can control. Investing and what to do with your savings are relatively easy problems.

smedleyb

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Re: Efficient Markets, RIP
« Reply #27 on: June 27, 2012, 10:54:53 PM »
I do think we're in a deleveraging period.

However I also don't think a bull run is out of the question.  I just don't know for sure.

I've also thought interest rates would rise in 2010.  And 2011.  And 2012.  And darn it, they just aren't rising.

And again, trying to track and guess broad trends is a far cry from trying to time individual stock purchases.  You seem to base arguments off broad economic indicators, but claim you can guess when a stock is undervalued as well.

If so, you should have no trouble being FIRE'd very soon.  I'm just more skeptical.  Not that it's not possible.  It's just very unlikely.

If we are in a deleveraging period, why is total leverage higher today than 2008?

A bull run presupposes a broad economic expansion and strong job growth; I put the odds of those happening at around 15% over the next 5 years.

Bonds have stayed strong due to imbalances out of Europe and a flight of capital to safe instruments, i.e., the 10 year bond.  Mish Shedlock has been all over this phenomenon since forever.

In fact, I feel much more comfortable timing individual stocks than entire markets.  But every investment decision incorporates an assimilation of several primary variables:  Marco-economic forces, company/market fundamentals, investor psychology, and technical analysis.  I look at all of them before formulating an investment thesis, and the weight given to each varies as well (for example, don't short a market -- no matter how overvalued and unsound it may be, or how bad the chart looks, or how crappy profit picture is -- if the government unleashes, say, 15 trillion to prop up the markets). 


smedleyb

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Re: Efficient Markets, RIP
« Reply #28 on: June 27, 2012, 11:05:07 PM »
Smedleyb,

A big problem i have with your approach is that, in the past, it demonstrably doesn't work as an investment strategy. My time frame is 40++ years, effectively infinite. Time and time and time again, the approach you seem to advocate as a way to invest one's stash is just not even close to being capable of delivering a sustainable return.  My way does, even in the past decade.

If you want to discuss ways to speculate, and explore hard to calculate  RRR investments, OK. But lets not say its a reliable way to accumulate one's core FI Stash capital. If you can show a repudiation of Modern Portfolio theory and boggle-headed implementation, go for it.

Speculation can have a place in a portfolio, even a Mustashian one. Calculated risk can lead to great rewards. And lets discuss Mustashian ways to speculate. But can we be clear this is not about speculating one's way out of debt or a low saving rate.

MMM offers a way out that is independent of the throw of a dice, or pretty much anything out of our own control, like the geopolitical global markets. Focus on what you can control. Investing and what to do with your savings are relatively easy problems.

I have repeatedly emphasized that one should only invest money one is prepared to lose.  Even in the FB thread I argued that the trade I had in mind involved 5% of my trading account, which is a fraction of my liquid accounts, which is a fraction of my total asset picture.  I don't seem to be recommending "going all in" or "backing up the truck" on any particular trade.

And I agree, "calculated risk can lead to great rewards."  I mean, isn't that partly why we buy stocks, for the allure of the 10 bagger? 

I'll say this: everyone I know who invests has made much more money -- considerably more -- buying individual stocks rather than entire indexes.  Oh, and these people are rich enough to be FI, even if they all pretty much still work.  In my case, index investing didn't bring me to the threshold of FI, stock picking did.  Techs in 98-2000, metals in 2005-2007, and cash in 2007-2009, banks in 2009, but jack shit since. lol!

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Re: Efficient Markets, RIP
« Reply #29 on: June 27, 2012, 11:49:12 PM »
And you're repeatedly wrong in that advice. I invest money to never loose. That's why it's not speculating.

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Re: Efficient Markets, RIP
« Reply #30 on: June 28, 2012, 12:36:21 AM »
You know, you have (in passing) put your finger right on the nub of the problem with your approach.

Thus, it appears that analysis, research, and hard work...

Yes, folks, that research & analysis stuff is hard work for most of us.  Unpleasant work, too.  So why should I, or most people, spend my time doing that hard, unpleasant work when any number of mutual fund managers are willing to do it for me, charging a quite modest fee for the service?

I'll certainly agree that the "efficient market" hypothesis has been disproven, which is why much of my money goes into value investing funds rather than index funds.  But either way, I'm not the one doing the hard work.

smedleyb

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Re: Efficient Markets, RIP
« Reply #31 on: June 28, 2012, 05:45:53 AM »
You know, you have (in passing) put your finger right on the nub of the problem with your approach.

Thus, it appears that analysis, research, and hard work...

Yes, folks, that research & analysis stuff is hard work for most of us.  Unpleasant work, too.  So why should I, or most people, spend my time doing that hard, unpleasant work when any number of mutual fund managers are willing to do it for me, charging a quite modest fee for the service?

I'll certainly agree that the "efficient market" hypothesis has been disproven, which is why much of my money goes into value investing funds rather than index funds.  But either way, I'm not the one doing the hard work.

Using that logic, why not pay someone to cook your meals, wash your clothes, scrub your toilets, and mow your lawn while you're at it?

And that's kind of the nub of the problem with automatic fund investing for me: people do everything right with their personal finances, up until the point they hand over their nest egg to these firms without doing the proper research, analysis, and hard work to ascertain if their money is being properly invested.  Even if most people decide to put all their money into funds -- again, I've stated repeatedly that funds are the proper vehicle for most to play the market -- they have an obligation to themselves and their families to understand the Wall Street machine and the nature of equities.



smedleyb

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Re: Efficient Markets, RIP
« Reply #32 on: June 28, 2012, 06:02:10 AM »
And you're repeatedly wrong in that advice. I invest money to never loose. That's why it's not speculating.

You see, that's where you're wrong -- you're not describing "investing, " you've just defined "winning."

Furthermore, investing and speculating are essentially similar activities, albeit with the latter being differentiated by an increase in the degree of risk posed by the investment.  Speculating requires more risk, but investing requires risk too.  I don't know why you think you can never lose.  The history of capital markets is littered with the corpses of individuals chasing "the sure thing."

Wanna get rich?  Maybe it's time to embrace more risk.  Why buy an S&P 500 index fund when 80% of the companies in it are just so-so, yet that other 20% drive the majority of the growth?  Why not set your sights on figuring out who falls into that 20% and just buy a basket of those companies?   

My intention in the thread is to discredit the idea that investors can't gain an edge though studying the stock universe to exploit obvious inefficiencies.  Nobody said it was gonna be easy, but we should no longer think it's impossible either.


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Re: Efficient Markets, RIP
« Reply #33 on: June 28, 2012, 07:33:31 AM »
Of course, I will be asked to "prove" these statements, as if quoting venerable market players like Ritholtz, Soros, and Buffett is simply insufficient evidence.
Yes, you will be asked to support your argument. Yes, it is insufficient. Appeal to authority is a logical fallacy. Moreover, of your links, not one has any meaningful support. The Bloomberg post about Soros is all of three sentences long, and that quote is the only one about the EMH, and it lacks substantiation or any form of support; the rest of the blurb deals with the Lehman brothers collapse. The Shiller/Ritholtz post states that the EMH is wrong and that it has been wrong, but doesn't support that with any actual evidence-- if it had really been "thoroughly discredited", don't you think that the author would have posted some of that damning information instead of just telling us that it was discredited? And finally, Buffett's piece is not a challenge to EMH but a self-serving pat on the back to nine of his value-investing buddies who have done well, despite the fact that he certainly knows more than nine people who practice the technique. Even if your appeal to authority weren't fallacious, your authorities either 1) aren't saying what you've said they are, or 2) are spouting unsupported opinions just like you. If I told you the markets had to be efficient because Jack Bogle said they were, and then linked Jack Bogle sharing his unsupported opinion, you wouldn't call that proof of the EMH. Why should we do the same?

My intention is to simply create a thread in which to discuss the presuppositions and inalienable truths held by some posters who cling to the discredited idea that markets are always efficient and rational.
The straw man argument is a logical fallacy. Inalienable does not mean what you think it means. Presuppositions are only implicit assumptions; further, my support of the EMH is not an assumption but a logical extension of economic data. Lastly, you mischaracterize my argument, and the idea has only been discredited by opinions, by your own admission in your feeble, fallacious appeal to authority above. I argued that there are no significant and systematically exploitable inefficiencies based on publicly known information in the market which do not quickly correct themselves, which is weak EMH, different than the strong EMH that you consistently choose to attribute to me because it's an easy argument to attack.

But that's because I think most investors are lazy about their finances.  I don't see how somebody who busts their ass to save a few bucks can turn around and entrust a total stranger with their net worth without bothering to educate themselves on the nuances, complexities, and extreme risk which comes with equity investing.
A core tenet of YMOYL, the FI movement as a whole, and Mustachianism in specific, is that reasoned consumption and care with money don't make life any worse than mindless consumption. I think 'ass-busting to save a few bucks' is an unfair characterization of the movement. You are also repeating but never substantiating that equity investing carries an extreme risk (Look here for your most recent sidestep of the discussion with an ad hominem. For the record, Argumentum ad hominem is a logical fallacy.) For the record, it's also a mischaracterization of my position that being informed about the actions of the market is a bad thing, an unnecessary thing, or even a trivial thing. Finally, index funds are not managed by people, and investing in an index fund does not rely on trust or strangers. I'll echo other posters in wondering if you truly understand what an index fund is, since you've misrepresented them over and over again now.

but we can't replicate what some Harvard hack with a newly minted MBA is doing just a few years removed from grad school with our precious retirement dollars? ... Winston Chase III, MBA fund boy with several billion IRA dollars at his disposal at Superfund Index Corporation? 
You continue to make a logically unsupported attack against mutual fund managers. I repeat: "If the very best managers in the business, charging 3% expense ratios, can't consistently produce results better than the market movements as a whole, which you're arguing by calling them hacks, then why the hell do you think you can?" If the market has inefficiences that can be exploited based on intuition, investor skill, any financial methodology, your relationship with your God, or the color of tie that the fund manager is wearing, why aren't there mutual funds that consistently outperform their indices? If you can have enough skill to exploit these inefficiencies, why can't genius financial professionals with access to incredible software and hardware systems, stunning quantities of data, and decades of experience? Because they didn't read Phil Town's Rule #1 like Joe Daytrader? Either the mutual fund managers aren't hacks, or there are no significant and systematically exploitable inefficiencies based on publicly known information in the market which do not quickly correct themselves. Sound familiar?

I thought Skyrefuge was saying that
such high fees don't really exist.  I was trying to show they do.
That fund has a net expense ratio of .76%. If there's another .5% management fee added to that, it's for the account. You only add the redemption fee when you go to sell the fund. You'd have to hold the fund for no longer than 15 months for the fee to be 3%, like you claimed, and much of that is unrelated to the fund itself. Moreover, that's an exceptionally expensive mutual fund. Crucially, it's not even an index fund. From the same link: "Our fundamental belief is that long-term, market-beating performance can be achieved through strict adherence to quantitative stock selection".

What if your asset allocation is all wrong?
The asset allocation can be mathematically evaluated with the set of tools falling under the broad umbrella of modern portfolio theory. Let me guess, you don't believe in it either. Moreover, how could an asset allocation be wrong? Are you arguing that in ten years we could look back and find a higher-yielding allocation strategy? Of course we could. That proves nothing. Even considering it in tandem with risk illustrates little in hindsight.

What if the age of the long decline of index funds is upon us -- a situation created by (a) a heavily indebted youth with scant job prospects and thus no income to invest, and (b) an aged and retired baby boomer generation looking to cash out their IRA money?
Characterizing youth as heavily indebted is inaccurate, as I've demonstrated all of a dozen times now. Job prospects are really not bad among college graduates, who I would say are more heavily into investing than high-school graduates, college dropouts, and high school dropouts. If they were, I'm sure you would have provided data to support your assertion. For example, in Ohio, all people aged 20-to-24 had an 11.9 percent unemployment rate according to Ohio Department of Job and Family Services. Even among college graduates the average debt was about $15k, and I've already demonstrated elsewhere that that value is totally manageable. Meanwhile, the average boomer has only $78k between all their 401ks and IRAs, according to a Center for Retirement Research study; likely, much of that money is in bonds and boomers heed the traditional advice of becoming more conservative as they approach retirement. Somehow, I don't see $40k of retirement-earmarked equities per boomer and $15k of student loans per college grad as a problem so colossal it'll sink the equities markets. More to the point, though, you've got these gloomy arguments that bear no relation to the actual economic facts of the nation.

I have repeatedly emphasized that one should only invest money one is prepared to lose.
You've repeatedly not substantiated this statement. I've repeatedly challenged it, and you've repeatedly run from the discussion to hide behind the observance that I'm younger than you. For the tenth time, there is no reason you can't have most of your net worth in equities if you are diversified. And there is no reason you should be convincing people to run and hide. Yes, you can have a losing year, and you could even have a losing five-year period. But it's not like your entire savings could just plummet to nothing because they're equities. That argument is inane and bears no relation to the actual reality of the economy, which is why you've repeatedly declined to double down on it by supporting it with evidence.

smedleyb

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Re: Efficient Markets, RIP
« Reply #34 on: June 28, 2012, 07:46:59 AM »
Again, I stand with Soros, Ritholtz, and Buffert, as opposed to an inexperienced investor with no skin in the game.

And as a former philosophy major, I thank you for that stroll down the informal logic lane.

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Re: Efficient Markets, RIP
« Reply #35 on: June 28, 2012, 07:59:21 AM »
And as a former philosophy major,

Appeal to Accomplishment fallacy

Sorry.. couldn't resist. ;)

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Re: Efficient Markets, RIP
« Reply #36 on: June 28, 2012, 08:01:17 AM »
Again, I stand with Soros, Ritholtz, and Buffert, as opposed to an inexperienced investor with no skin in the game.

And as a former philosophy major, I thank you for that stroll down the informal logic lane.

Honestly dude, you can't ask for a reasonable discussion and when there is some, just ignore every single argument and dismiss them.

Why should anyone address your arguments if you won't address anyone else's?

You purport to want discussion, then refuse to have it.
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grantmeaname

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Re: Efficient Markets, RIP
« Reply #37 on: June 28, 2012, 08:02:52 AM »
Appeal to Accomplishment fallacy

Sorry.. couldn't resist. ;)
It works better in size 12 and underlined. That's clearly the only part of my post he noticed besides my username.

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Re: Efficient Markets, RIP
« Reply #38 on: June 28, 2012, 08:08:01 AM »
That's clearly the only part of my post he noticed besides my username.

Count yourself lucky.  I've made 1200+ posts and he still can't get my username right, even when it's been pointed out to him that he's got it wrong.  ;)

smedley, at this point it doesn't seem like we're going to go anywhere.  You're pretty entrenched in what you believe.  Those of us who feel differently, likewise.

Based on the last few posts between you and Tim, I just don't see this thread resolving at all, or even being helpful anymore.

Would you like to add more, or are we done here?
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smedleyb

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Re: Efficient Markets, RIP
« Reply #39 on: June 28, 2012, 08:14:45 AM »
Again, I stand with Soros, Ritholtz, and Buffert, as opposed to an inexperienced investor with no skin in the game.

And as a former philosophy major, I thank you for that stroll down the informal logic lane.

Honestly dude, you can't ask for a reasonable discussion and when there is some, just ignore every single argument and dismiss them.

Why should anyone address your arguments if you won't address anyone else's?

You purport to want discussion, then refuse to have it.

Funny, when I wanted to debate you about what you said in another thread, after you referred to my thought process as nonsense, I got this:


I have no comment other than to reiterate my earlier stance.

Quote from: arebelspy on June 26, 2012, 04:40:15 PM
no one should take investment advice from anyone giving it away free online (myself included).


So I get it -- it's cool when you just repeat what you say, in order to make a point;  but when I do it, I'm just uncool. 

But in the spirit of honest discussion, I'll circle back to her treatise at some point -- even if I feel like I've gone over the stuff repeatedly -- but unfortunately I gotta work and can only respond in bits at a time. 



tannybrown

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Re: Efficient Markets, RIP
« Reply #40 on: June 28, 2012, 09:19:45 AM »
This whole thing just seems personal and petty.  Just my $0.02.

JohnGalt

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Re: Efficient Markets, RIP
« Reply #41 on: June 28, 2012, 09:22:07 AM »
smedleyb, arebelspy, and grantmeaname...

I've enjoyed watching this thread as well as the few previous threads preceding it. 

I just thought I would point out that, to an outsider of the discussion, there doesn't appear to be a fundamental difference between your investment philosophy.  Instead, it seems to be more a matter of degree.

Maybe it would make sense to work on a list of agreed upon sentiments vs those you disagree on to keep the discussion going in a focused and productive direction?



What you seem to agree on:
Most investors lack the knowledge, patience, etc to warrant putting any more than a trivial amount of their networth into market timing and individual stock trading.
Even if they only invest in index funds, it is still useful for every investor to have a good understanding of the funds they are selecting, stock fundamentals, and the forces at play in the market
Markets are not always efficient
It is possible for investors with the right knowledge, patience, etc to beat market returns consistently

What you seem to disagree on:
The level of rarity of the necessary knowledge, patience, etc to make individual stock picking and/or market timing a good strategy for any particular individual investor to attempt

mechanic baird

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Re: Efficient Markets, RIP
« Reply #42 on: June 28, 2012, 10:04:12 AM »
Hey smedleyb,
Just a suggestion for you. If you feel the obligation to help ppl preserve their hard earned money and you think you are so smart about investing... apply for a fund manager or a stock picking job. I work at an asset management company.. We have seats on the 7th floor where our portfolio top dogs are, come and apply for one.. you can make millions and help me to make millions in my 401K...

Do something tangible if you think you are so smart about investing...Go to wall street and try to change it  or something...  typing away on internet yipping here and there to some random folks seems to be a waste of time dude..

tooqk4u22

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Re: Efficient Markets, RIP
« Reply #43 on: June 28, 2012, 10:24:18 AM »
This has been a great thread that was triggered by the discussions in another thread that got of topic somewhat and there too people made their opinions and had drawn a line in the sand. https://forum.mrmoneymustache.com/investor-alley/telefonica-good-to-go-or-stay-away/msg15752/#msg15752

It has been hard to keep up with the speed of responses.

John - your summary is fairly accurate about their agreements and disagreements.

I am sure I can quote a bunch of posters above but the short story is that I do think that individuals can beat the market over time but only if they are educated, informed and willing to take on more risk.  While information is public there is still plenty of information that is not read or interpreted in different ways. Also keep in mind that professional managers have difficulty beating the market simply because their assets under management become way to big and their analysis starts being passed to recent grads or whatever (Buffett is struggling with this issue, I am sure he could still find a $50MM company that would produce outsized returns but the fact is that it wouldn't even move the dial a fraction so he can't focus on those types of deals)

If you want to invest in individual stocks you need to have a solid understanding of financial and trend analysis, as well as willingness to understand sectors and industry drivers/trends. You also need to have the rright emotional demeanor and risk tolerance. I tend to believe that the majortity of people don't have the these abilities, and then those that do don't have the willingness to do the work involved.  Bottom line then almost everyone should go the index route.


James

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Re: Efficient Markets, RIP
« Reply #44 on: June 28, 2012, 10:25:35 AM »
Hey smedleyb,
Just a suggestion for you. If you feel the obligation to help ppl preserve their hard earned money and you think you are so smart about investing... apply for a fund manager or a stock picking job. I work at an asset management company.. We have seats on the 7th floor where our portfolio top dogs are, come and apply for one.. you can make millions and help me to make millions in my 401K...

Do something tangible if you think you are so smart about investing...Go to wall street and try to change it  or something...  typing away on internet yipping here and there to some random folks seems to be a waste of time dude..


This.


While I think your intentions are good and your opinions honest, I just don't find them convincing.

mechanic baird

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Re: Efficient Markets, RIP
« Reply #45 on: June 28, 2012, 10:55:00 AM »
Hey smedleyb,
Just a suggestion for you. If you feel the obligation to help ppl preserve their hard earned money and you think you are so smart about investing... apply for a fund manager or a stock picking job. I work at an asset management company.. We have seats on the 7th floor where our portfolio top dogs are, come and apply for one.. you can make millions and help me to make millions in my 401K...

Do something tangible if you think you are so smart about investing...Go to wall street and try to change it  or something...  typing away on internet yipping here and there to some random folks seems to be a waste of time dude..


This.


While I think your intentions are good and your opinions honest, I just don't find them convincing.

I am just being sarcastic...
Too many people sit around and yip away and thinking they are so good at something.. in reality, if they are really good, they should have already done it and prove to the world that world is wrong

So my real intention is that if smedleyb can lay out his trades, those actually got executed, month after month, show us what he has actually done, show us that he has made money using his thought process... that'd be more convincing..

Action always speaks louder than words. I'd like to see some real action..

BTW, trying to be one of our fund managers is climbing mount Everest... only a few can do... so I am just being sarcastic ...

James

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Re: Efficient Markets, RIP
« Reply #46 on: June 28, 2012, 11:26:44 AM »
While I think your intentions are good and your opinions honest, I just don't find them convincing.

I am just being sarcastic...
Too many people sit around and yip away and thinking they are so good at something.. in reality, if they are really good, they should have already done it and prove to the world that world is wrong

So my real intention is that if smedleyb can lay out his trades, those actually got executed, month after month, show us what he has actually done, show us that he has made money using his thought process... that'd be more convincing..

Action always speaks louder than words. I'd like to see some real action..

BTW, trying to be one of our fund managers is climbing mount Everest... only a few can do... so I am just being sarcastic ...
[/quote]

I'm sorry, my comment was supposed to be to smedleyb, not you.  I should have been more clear, I was seconding your idea.

grantmeaname

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Re: Efficient Markets, RIP
« Reply #47 on: June 28, 2012, 11:31:57 AM »
For the record, the name's Grant, hence the pun. Tim was a Monty Python reference, I think.

mechanic baird

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Re: Efficient Markets, RIP
« Reply #48 on: June 28, 2012, 11:33:11 AM »

I'm sorry, my comment was supposed to be to smedleyb, not you.  I should have been more clear, I was seconding your idea.
LOL. My bad of reading it wrong. Thx James

Jamesqf

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Re: Efficient Markets, RIP
« Reply #49 on: June 28, 2012, 12:42:04 PM »
Using that logic, why not pay someone to cook your meals, wash your clothes, scrub your toilets, and mow your lawn while you're at it?

Many people do just that.  I don't myself, because I actually enjoy cooking and gardening, and the clothes washing and toilet scrubbing require trivial amounts of time.

But let's look at some numbers.  Say I have, in round numbers, $250K invested in mutual funds.  Adding up the expense ratios for the various funds gives an average of about 0.7%, so I pay about $1850/yr for management.  Suppose that I managed my investments myself.  I might easily spend a couple hundred hours a year researching individual stocks, watching their movements to pick times to trade, etc.  So my return on doing my own investment research - assuming I could trade for free, and could do as good a job of stock-picking as the fund managers - would be around $9.50/hr.  Since I can make over 5x that much per hour doing work that - believe it or not - I actually enjoy, that does not seem like an optimal use of my time.

Quote
...they have an obligation to themselves and their families to understand the Wall Street machine and the nature of equities.

Sure.  Just as it makes sense to know how a car works, for instance.  But that doesn't mean that the average person should go out and build their own car.